The UK High Court has ruled on whether a term to exercise express contractual rights in good faith should be implied into a commercial agreement, and the test to be applied by the court when assessing this.
In this case, Westerzagros (W) was involved in negotiations with the Kurdistan government concerning an oil exploration and production project. Monde (M) was assisting as consultant. The contract between W and M provided that, once the project was underway, M would receive a share of the oil production profits. The negotiations were concluded successfully. Shortly afterwards, W terminated the contract with M pursuant to the express termination provisions. M argued that the termination had deprived it of its right to participate in the profits of the oil production and that W had, therefore, terminated the contract in bad faith. It argued that it should be an implied term of the contract that W would not exercise its right to terminate in bad faith.
The High Court refused to imply a term into the contract that W would not exercise its right to terminate in bad faith. It reviewed those recent cases in which the courts have been willing to imply terms into contracts requiring parties to exercise their contractual rights in good faith. Importantly, the court confirmed that the usual tests for implying a term into contracts should be used when deciding whether to imply a good faith requirement into a contract (the implied term must be necessary to give business efficacy to the contact or be so obvious as to go without saying). The mere fact that a contract concerned a long term relationship between the parties was not enough in itself to justify the implication of such a term. The court also went on to say that it was unlikely that an express contractual right to terminate could ever be subject to a restriction to exercise it in good faith. A party, the court said, should always be able to exercise this right, regardless of its reasons for doing so.
There is no general principle of good faith around contracts in English law, and this ruling is consistent with that position. It confirms that the courts respect freedom of contracting and will give effect to the bargain agreed by the parties without interference, unless it is clearly necessary for the courts to intervene. Therefore, no changes to drafting practice are required in response to this judgment.